GST Input Tax Credit Guide
GST Input Tax Credit Guide
GST is an indirect tax levied on goods and services based on the principle of value addition. Hence, the levy of tax is based on the value added at each stage of the supply chain till the product or service reaches the ultimate consumer. In such a tax system, to negate the cascading effect of the tax, there exists a means to set of taxes paid on procurement of raw materials, consumables, plant and machinery, equipment, services, etc., that are used for the manufacturing or supply of goods and services. This element used to offset the tax liability is called input tax credit. In this article, we look at the concept of Input Tax Credit under GST in detail.
What is Input Tax Credit?
Under GST, each person having a GST registration in the supply chain takes part in the process of controlling, collecting GST tax and remitting the amount collected. However, to avoid double taxation and cascading effect of tax, input tax credit is provided as a means to set off tax paid on procurement of raw materials, consumables, goods or services that was used in the manufacturing and supply and sale of goods or services. By using the input tax credit mechanism, businesses are able to achieve neutrality in the incidence of tax and ensure that such input tax element does not enter into the cost of production or cost of supply of goods and services.
Eligibility for Claiming Input Tax Credit
Input tax credit can be claimed only by a person having GST registration and based on proper documentation and filing of GSTR-2 returns. The following documentary requirements must be satisfied by a taxpayer for claiming input tax credit.
- An invoice issued by the Supplier as per the GST Rules for Invoice; or
- A debit note issued by a supplier; or
- A bill of entry or any similar document; or
- An ISD invoice or ISD credit note or any document issued by an Input Service Distributor.
In addition, the following conditions are also applicable for claiming input tax credit:
- The taxpayer is in possession of a tax invoice or debit note issued by a registered supplier or other tax paying documents.
- The taxpayer has received the goods and/or services.
- The tax charged in respect of the supply has been actually paid to the account of the appropriate Government, in cash or through utilisation of available input tax credit.
- The taxpayer has filed the the necessary GST filings.
Goods & Services Not Eligible for Input Tax Credit
Under GST, input tax credit is not available in respect of the following goods or services:
- Motor vehicles, except when they are supplied in the course of business or used for providing taxable services like:
- Transportation of passengers
- Transportation of goods
- Providing training on driving, fling, navigating such vehicles
- Further supply of such vehicles or conveyance
- Supply of goods and/or services in relation to food and beverages, outdoor catering, beauty treatment, health services, cosmetic and plastic surgery except where such inward supply of goods or services of a particular category is used by a registered taxable person for making an outward taxable supply of the same category of service
- Membership of a club, health and fitness centre
- Rent a cab, life insurance, health insurance, except where it is statutorily obligatory for an employer to provide such services
- Travel benefits extended to employees on vacation such as leave or home travel concession
- Goods and/or services received by the principal in the construction of immovable property, other than plant and machinery except where it is an input service for supply of works contract service
- Goods and services received by a taxable person for construction of an immovable property on his own account, other than plant and machinery, even when used in the furtherance of business
- Goods and services on which tax has been paid under composition scheme
- Goods and services used for personal consumption
- Goods lost, stolen, written off or disposed by way of gift or free samples
- Tax paid after detection of fraud, wilful misstatement or suppression
- Tax paid for release of detained or seized goods
- Tax paid for release of confiscated goods
Utilisation of CGST and SGST Input Tax Credit
The following illustration shows the preference for utilisation of GST Input Tax Credit:
The CGST and SGST input tax credit will be credited to the electronic credit ledger of the taxpayer, maintained by the GST Network. The amount of input tax credit in the electronic credit ledger can be used for payment of output tax payable under the GST Act. The amount of input tax credit on account of CGST must first be used for payment of CGST and the amount remaining, if any, can be utilised for payment of IGST. The amount of input tax credit on account of CGST on the electronic credit ledger cannot be utilised for payment of SGST.
Further, its important to note that only payment of output tax can be made by utilising the input tax credit. Any payment on account of penalty and interest is necessarily to be made out of the amount available in the electronic cash ledger of the taxpayer.
Utilisation of IGST Input Tax Credit
The IGST input tax credit is also credited to the electronic cash ledger of the taxpayer, under the head IGST, maintained by the GST Network. The amount of input tax credit available on account of IGST must first be used towards payment of IGST and the remaining amount, if any, can be utilised for payment of CGST and SGST, in that order. Also, in case the taxpayer has any CGST input tax credit available on the account, it must be first utilised for payment of CGST and the amount remaining, if any, can be utilised for payment of IGST.